Fundamental Analysis—the Key to Controlling Your Investments
You may not want to be a stock analyst, but you probably want to be able to understand what your investments are doing. You may want to be a Wall Street tycoon, or you may simply want to play a more active role in managing your portfolio. Either way, you have to have an understanding of fundamental analysis. It is, after all, the cornerstone of investing.
Quantitative Analysis is Where It Starts
The bulk of your work in fundamental analysis is in quantitative analysis. This is essentially the number crunching part, and for your data, you have to look in to the financial statements. This means the expenses, liabilities, revenue and assets and everything else about a company's finances. This goes a long way toward seeing how a company will perform in the future.
The essential documents you will be looking at are the income statements, balance sheets and cash flow statements. Once you have all these numbers, you will have to see how they all fit together as a portrait of the company's performance. This provides the concrete element of your fundamental analysis.
Qualitative Analysis--Looking at the Gray Areas
Qualitative analysis is also a major part of fundamental analysis, but it's far less concrete than quantitative analysis. Here, you're not evaluating straightforward numbers, but qualities such as brand recognition, the quality of their key executives and board members, and public relations. You will also be looking at such things as their ethos and ethics; things like employee relations and if they seem to "cook the books."
Some analysts consider this aspect of fundamental analysis as being too nebulous and subject to opinion. Perhaps they're right, but isn't a lot of what happens in the world of finances based on opinions? We see it all the time in the news where a company's stock plummets due to public opinions based on what the executives are doing in a qualitative sense rather than a quantitative sense. Enron, for example, crashed once people found out that they were indulging in unethical practices.
Intrinsic Value--the Point of Fundamental Analysis
Intrinsic value is ultimately what you're looking for with fundamental analysis. What you're trying to see with this is if a stock is being traded at, above, or below what you determine to be its real value. This can help you decide whether it's worth investing in or not.
Let's say that you've evaluated a stock as having an intrinsic value of $20 per share. You see that it's being traded on the market at $25 per share. You don't want to invest in this company, because it's being sold for more than its actual worth. Inversely, if you see that a company is being sold at $20 per share and you determined its intrinsic value to be $25, you will want to buy it because essentially, it's being sold at a discount.
Ultimately, does fundamental analysis actually work? There are many people which are for it, and many which are against it. Those that are against it are either the "strict data" hardliners or those who believe that the stock's value is the actual value. If you think about it, isn't it best to have all the information you can about a stock you're interested in buying, instead of being blindsided by something you've overlooked?
Quantitative Analysis is Where It Starts
The bulk of your work in fundamental analysis is in quantitative analysis. This is essentially the number crunching part, and for your data, you have to look in to the financial statements. This means the expenses, liabilities, revenue and assets and everything else about a company's finances. This goes a long way toward seeing how a company will perform in the future.
The essential documents you will be looking at are the income statements, balance sheets and cash flow statements. Once you have all these numbers, you will have to see how they all fit together as a portrait of the company's performance. This provides the concrete element of your fundamental analysis.
Qualitative Analysis--Looking at the Gray Areas
Qualitative analysis is also a major part of fundamental analysis, but it's far less concrete than quantitative analysis. Here, you're not evaluating straightforward numbers, but qualities such as brand recognition, the quality of their key executives and board members, and public relations. You will also be looking at such things as their ethos and ethics; things like employee relations and if they seem to "cook the books."
Some analysts consider this aspect of fundamental analysis as being too nebulous and subject to opinion. Perhaps they're right, but isn't a lot of what happens in the world of finances based on opinions? We see it all the time in the news where a company's stock plummets due to public opinions based on what the executives are doing in a qualitative sense rather than a quantitative sense. Enron, for example, crashed once people found out that they were indulging in unethical practices.
Intrinsic Value--the Point of Fundamental Analysis
Intrinsic value is ultimately what you're looking for with fundamental analysis. What you're trying to see with this is if a stock is being traded at, above, or below what you determine to be its real value. This can help you decide whether it's worth investing in or not.
Let's say that you've evaluated a stock as having an intrinsic value of $20 per share. You see that it's being traded on the market at $25 per share. You don't want to invest in this company, because it's being sold for more than its actual worth. Inversely, if you see that a company is being sold at $20 per share and you determined its intrinsic value to be $25, you will want to buy it because essentially, it's being sold at a discount.
Ultimately, does fundamental analysis actually work? There are many people which are for it, and many which are against it. Those that are against it are either the "strict data" hardliners or those who believe that the stock's value is the actual value. If you think about it, isn't it best to have all the information you can about a stock you're interested in buying, instead of being blindsided by something you've overlooked?